DEAL TIME! The AMROC Access Fund LLC

Adam Gower: Alan, what a pleasure to see you, again. You're my new BFF.

Alan Donenfeld: Good to see you, Adam. How are you?

Adam Gower: Good. Why don't you start by introducing yourself, your company name, your position, brief summary of what you do and then let's get into the AmRoc Access  Fund. I'm very interested to hear about that.

Alan Donenfeld: Terrific. So, Alan Donenfeld, Founder and CEO of CityVest Capital. We are an online marketplace for, what we call is, access funds. We provide access to institutional real estate, private equity funds. So, we don't do any single deals, no sponsored deals. They all are seasoned real estate private equity fund managers, typically greater than $100 million in AUM, audited track record using administrators, lots of due diligence. Hopefully, it's a solid institutional product that has been somewhat inaccessible by individual investors at $25, $50, $100,000 amounts. We make that accessible through a feeder fund structure that, up to 99 investors can invest in, in each of these access funds. We come out with a new one every six weeks or so, and we've got a new one named AmRoc Access Fund that we're offering now.

Adam Gower: So tell me everything about the AmRoc Access Fund. Let's start at the top. Kind of give me the high-level overview and then we'll dive in.

Alan Donenfeld: Yeah. So I met the Investment Manager, Jeff Klotz from AmRoc Premier Capital about five years ago. Based in Jacksonville, which is Florida, overall, has become a fairly hot market back when I met him five years ago. It seemed like Jacksonville and North Florida was a fairly small market, but it's really come into its own, with Jacksonville, Orlando and Tampa being excellent growth markets, and this is their latest fund. They have a superb track record. Over the past 10 years, they've bought about 250 different properties. A little over $3 billion in aggregate acquisition price and generated a 28.7% net IRR. That's after all fees, after carried interest promotes - 28.7% with an administrator of gate service providers, so, they have an excellent track record. They're now raising $250 million in their latest AmRoc Premier Opportunity Fund. And, so we've created the AmRoc Access Fund, which will be a $5 or $6 million feeder fund, investing in the underlying AmRoc Opportunity Fund. And, our fund has negotiated a side letter agreement where we are to receive a 13% preferred return, followed by 80% of profits - 80/20 split with the investment manager. While, if you were to invest $250,000 or more directly into that AmRoc Premier Opportunity Fund, you would only get a 10% preferred return, followed by 80%, but that 80% steps down to as low as 50/50 share of profits when the underlying fund achieves a 20% return or greater. So, our terms are substantially more attractive, providing access to this institutional fund and we've outlined it in detail on our website at CityVest.com.

Adam Gower: You've forgotten something very, very important.

Alan Donenfeld: What's that?

Adam Gower: What is the asset class? What does the AmRoc Access Fund invest in? What is this fund all about? Tell me about it.

Alan Donenfeld: Sure. So the underlying investment manager, AmRoc, based in Jacksonville, has 450 employees spread across 6 different divisions. A couple of divisions doing management of properties. That's primarily for other real estate private equity funds that are not located in Florida. AmRoc will manage those properties. They have a couple of development and construction divisions. So they will both develop some properties. They will be the construction company and GC of properties. They have a capital markets division and the investment management division. So, fairly diversified, large entity - having bought $3 billion of properties over the past 10 years. The asset class that they are expert at, is the B to C value-add properties. So, not only can they obviously manage the properties, but the value-add work, which can range in price dramatically, they can handle that all in-house, manage the property. And then at the end of the 5-year investment term for the fund, they can get the highest possible price. Now, because they have so many employees and so many divisions, if there's a, say, Chicago-based private equity fund that owns a property in Florida that AmRoc is simply managing for them, it's easy to see that if that Chicago-based private equity fund wants to sell that property, the manager is going to know about it first. Either they're looking to spruce it up, clean it up in some way, get it fully rented, lower the...whatever it might be, AmRoc's going to hear about it first.

Alan Donenfeld: And so, their investment management arm that invests in properties, are going to hear about the sale of the property first. Same with refinancing of properties. Their reach into knowing what's happening in northern Florida and there are other markets which include Houston and Texas, Atlanta, in Georgia, and North and South Carolina. You know, obviously that's across the south. But, primarily in northern Florida, they're seeing the greatest opportunities. While they will do some development work, they may buy some developments that are almost completed. They may have to come in with their construction crew and finish the property. Or there may be some ground-up developments, but that's a small percentage of the fund. They're primarily focused on B to C properties, built in the 70s or 80s, somewhat run down, not getting very strong rental prices. But AmRoc has their finger on the pulse of their market, and they know that if average rents right now were at $1,100 for a B-class property, but A-class properties are getting $1,400, they know how to spend the money, get that property up to B-plus, A-minus and get those higher rents to be able to produce  a fairly strong internal rate of return on a sale in 5 years.

Adam Gower: So it's value-add multi-family B and C class properties.

Alan Donenfeld: Yes. That's been their bread and butter for quite a while. It's, I believe that the safest area of real estate and one of the strongest - we've all heard of rent and price increases in real estate over the past year. Florida and Texas and North Carolina and Tennessee, to a smaller extent, have - not North Carolina but, have a unique position of not having any state income taxes. So, Florida is growing rapidly, as is Texas and Tennessee. North Carolina has had some big tenants move into the research triangle, in Raleigh-Durham, for example. Apple has moved a facility there. So, these are all markets where population has been growing. We know the migration from California, the Northeast, the Upper Midwest, moving to southern states. It's a significant population increase. It's easy to read about those increases through studies by trucking companies, moving companies. They have the exact numbers of the number of trucks moving from one area to the next, where they're moving people. And so it's a fairly identified statistic of how many trucks are moving, how many would that represent, and it's fairly significant of the number of people moving to Florida. In addition, the average income in those states, Texas and Florida specifically, the average income has been going up. So, it's a dynamic with higher incomes and more people means that there is a greater wealth in those two states specifically, and that means that there are higher real estate prices to come.

Adam Gower: Fabulous so, what is the term? How many years is the fund, Alan?

Alan Donenfeld: It's a typical fund. 5-year term with two 1-year extensions. They do like to sell properties in the third, fourth and fifth year, although there may be some group of properties that haven't yet sold for whatever reason - they haven't renovated a large enough percentage or whatever the issue might be. There may be some properties held into the sixth or seventh year, but they do want to sell a majority of the properties by the fifth year.

Adam Gower: And what is the capital call period? Talk to me about that in this case. How does that work with the Access Fund?

Alan Donenfeld: Yeah. So because CityVest is an access fund and we're dealing with 99 investors into our access fund, we negotiated with AmRoc, for them to call all of our capital at the very beginning. So when an investor invests in our fund, we will aggregate that money. We're closing at the end of February, at the end of this month and investing all of that money into their fund. On that date, our pref will start accruing. It's a 13% pref. That's merely the hurdle after which the investment managers start sharing the profits. So we're not going to produce a 13% cash-on-cash return, for example, but it does mean that our pref does start accruing. So, we do expect that that money will be put to work in the near term. I don't know if it's in the first couple of months after we invest, but certainly within a couple of months, it will be invested and they are raising a total of $250 million, so they will continue to raise capital throughout the year.

Adam Gower: And what are the targeted returns? You've talked about the splits and the breaks. Talk to me about the targeted returns for the access fund - investors, in terms of, yeah, total returns, yeah.

Alan Donenfeld: Yeah. So historically, since 2012, they've bought about 250 properties, over $3 billion of properties. 28.7% net IRR on that group of properties. So it's a tremendous return. For this fund, it's obviously a different time period. The last 10 years have been fantastic, so they were able to achieve that upper 20s return. For this fund, they're targeting an 18% return. However, that is for investors that invest directly into their fund, where they're offering the 10% pref, followed by an 80/20 split that ratchets down to 70/30, 60/40 and 50/50. So for us, I would anticipate that we would achieve at least a 3% greater IRR than a direct investor, given our 13% pref, and then maybe even a touch more because we are fixed at the 80/20 split of profits. So I'm hoping that, even after CityVest fees, which is 1.75% per year, I believe that we will be able to deliver for our investors, something over 20% IRR.

Adam Gower: And just tell me, what is the geographical area? You mentioned a few locations, but what are their - what are they focusing on for this fund? What are the areas they're looking at specifically?

Alan Donenfeld: Right. So the markets they know the best are North Florida, specifically Jacksonville, Atlantic Beach, where they're located. But they also have significant experience in Orlando. Tampa has been a fantastic market in many reports by CBRE and others. Tampa is one of the top 10 fastest growing cities in the country. They also have deep experience into Houston, Atlanta, Raleigh, Durham and Charlotte, North Carolina.

Adam Gower: What is the distribution frequency for your investors? How often will they be getting checks and from when exactly, after they make their investment?

Alan Donenfeld: Yeah. So this is typically an area of consternation by investors in private equity funds. So, there are quarterly distributions. The question is, what are those quarterly distributions? Clearly, in a credit fund or in a fund that is lending money, you would have a more regular stream of distributions to make. They may not get very large. You may get a 10% steady stream of distributions or if you're investing in core properties where you're not really increasing the rent, but you're buying a building, it's 100% or 95% occupied, you can easily have a very steady distribution on a quarterly basis. It, unfortunately, is not true in a value-add fund for a couple of reasons. First, if you were lucky enough that 40% of your tenants, in a multi-family development, moved out, allowing you to renovate and re-let those apartments, at a higher rent, then you'd have no income for one or two months on 40% of your properties. So assuming that you were buying at, say, a 6 cap rate, which is possible in many of the markets that AmRoc is in, at a 6 cap rate on a levered basis, maybe that gets up to 8% theoretical on a cash-on-cash basis. However, if some of your apartments just aren't rented because they're being renovated, that would come down. In addition, because this is a private equity fund, there may be some amount of capital that's in the fund that's not invested. That's kind of a two edged sword. If you have capital in the bank, ready to deploy, you may be able to acquire a property on a much more opportunistic basis, where the properties for sale, AmRoc can go in and say, we'll pay all cash, close in two weeks, but we want to buy the property 80% of your ask.

Alan Donenfeld: That's on the good side. On the bad side is, you have money sitting in the bank not earning any interest. And so as they are, they will be raising capital throughout the year, there may be capital that is in the bank, not earning any interest, and also where there might be some apartments that are to be renovated that just aren't earning any cash flow. So that will take you through the first 18 months of the fund. At that point, you should be through with the bulk of the renovations. The fund is fully capitalized and invested within that period of time. And so towards the third year, you should be able to get a cash-on-cash return that's around an 8% and going up from there, depending on the level of the renovations and how high of a rental increase you've been able to achieve. There may be cash-on-cash returns in year four that approach 10%, even 12%. That's about the time that they're going to be interested in selling these properties. They've been stabilized, generating a strong cash flow. That's when they can get a fairly large price and start returning the capital to investors in the form of capital gains.

Adam Gower: So the 13% accrues for however long and then cash-on-cash kicks in at years 3 and 4 and then, once there's a sale, all that accrued pref is paid. The investors are paid off their capital and they get their pro-rata 80% share of the profit. Is that correct?

Alan Donenfeld: Exactly right. So, while the underlying or the direct investors are due to get something around an 18% percent return, I think we'll be at 20-21% IRR for our investors as a result of the higher pref that we have, as well as the 80% of profits.

Adam Gower: So another question that everybody asks and wants to know is about the alignment of interests. Now we know what your fees are, 1.75% of AUM annually - of invested capital, annually.

Alan Donenfeld: That's correct. Yes.

Adam Gower: What are the fees to the sponsor, in this case?

Alan Donenfeld: So, sponsor fees are usually in a fairly tight band. They're not usually extreme for any one fund or another. But there is an acquisition fee that AmRoc charges - 2% of that acquisition cost. They do charge 2% per year. That typically will vary with other funds. 1.5% - 2%. I haven't seen any funds over 2% and I haven't really seen any funds - there might be a couple down at 1% but   they might have other fees to make up for that. So AmRoc is at 2% and then there is a disposition fee because they will be selling those properties, and that's a 2% fee of the amount of the sale.

Adam Gower: So, one question then. So that's 2% of the amount of the sale at disposition for each of the properties?

Alan Donenfeld: Right.

Adam Gower: What about for properties that don't make money?

Alan Donenfeld: So, one of the advantages of a fund versus going deal by deal or picking a individual property is that, the entire net operating income of the group of properties are netted against each other and that creates the pool of capital to make distributions. When all of the properties are being sold, that 80/20 split for us, is over that 13% return. To the extent that there's one, two or three properties that are negative, that would impact the total amount available to be distributed. And so, if they would have a terrible fund and a couple of total losers where they get - they lose all of their money, that would be netted against their winners. And so that's why a 13% pref for us is highly desirable. That means we're going to get 100% of our pro-rata share of distributions to us, prior to management getting anything. And that 13% is across the portfolio of properties, creating a little bit less risk of one or two or three properties being losers.

Adam Gower: Right. And you get prior to the management getting anything other than their fees.

Alan Donenfeld: They would get their fees, but they don't get a percentage of profits. If you would look at, what creates the greatest wealth for a private equity fund manager? It's typically the percentage of profits. That's what they're really working for. That's where they can make the most money. And so, their goal is to generate the highest return for investors. There's total alignment in that way that, they want to produce the highest return. They're not after these fees. Typically, a lot of the fees that they would charge for that acquisition or disposition fee is paid out to the people on their staff for doing that level of work. It's not really a huge profit center for them, as compared to the profits that they can make from a percentage of profits.

Adam Gower: What's their co-invest, Alan? And do you co-invest in these deals? Just curious.

Alan Donenfeld: Yeah. So we put around $100,000 in each of our access funds. That's true in this case, for AmRoc Premiere Capital Management. The investment management company, they're putting in 1% of the fund. It's targeted to be a $250 million fund, so it's up to $2.5 million that they will be putting into - this AmRoc Premier Opportunity Fund.

Adam Gower: Are there any early exit possibilities for investors? Your investors?

Alan Donenfeld: Yeah. There's no guaranteed exit, if you want to get out in year three or four. There are a couple of avenues to gain liquidity. If you need it for kid's education, buy a new house, whatever that might be. And one could be - there are a couple of secondary markets that could have an interest in buying your position. That certainly would be something that we could assist with. In addition, though, CityVest is working on its own pool of capital, partly to be used to buy in the interest of any of our investors that need liquidity. So if somebody invests $100,000, within the year, we hope to be in a position to buy that back from the investor if they need liquidity.

Adam Gower: Got it. What is the fund's leverage policy?

Alan Donenfeld: The amount of debt that they target for the fund is between 60 and 65% percent, so it's not overly levered, but there is a amount of leverage. That's how they're able to achieve that 18-20% IRR that they're targeting.

Adam Gower: And what is the exit plan? How many assets are going to go into a $250 million fund and what is the exit plan?

Alan Donenfeld: So it's about 10 to 15 different properties, depending on the size. $250 million in equity is a large asset pool, which may be up to a billion dollars of acquisitions. That's in line with their capabilities. Over the last 10 years, they've actually deployed $3 billion of total acquisitions. So, this fund may be around a billion dollars of acquisitions. That's actually at 75% financing. So, maybe it's actually about $800 or $900 million in total acquisitions. The exit will be, obviously, for them to sell these properties, generate capital gain since these will be fully renovated stabilized properties at that point. The buyers will be insurance companies or REITs, neither of which want to take on big renovation projects. These will be fully renovated. Hopefully, you know, 95-100% occupied, stable rents. Those are just the assets that REITs, insurance companies, family offices, want to buy, and they're willing to pay up, i.e. a higher price, a lower cap rate for properties that meet those criteria.

Adam Gower: Last question.

Alan Donenfeld: Yes.

Adam Gower: So who is - actually, two last questions.

Alan Donenfeld: Yeah.

Adam Gower: The first last question is - who is your investor avatar? Who is the ideal person who should be clicking on the link and learning more about this, from your perspective, for your access fund?

Alan Donenfeld: Right, so - if you want to make a direct investment into the fund because you want to have a little bit more controlled direct link to the actual fund, you'd have to invest $250,000 or more. So, even if you wanted to invest $250,000 - $500,000, it actually would be in your best interest to invest through CityVest since we're not only getting that higher pref but also a greater percentage of the profits and our one 1.75% fee. Most people say, that's too low, you're not making enough, you deserve a lot more. Nonetheless, that's what the fee is. We probably will increase those fees in the future, but that's what it is today. So we do have a fair number of family offices that are starting to invest $250,000 - $500,000. I have one investor that regularly comes into our offerings at around $700,000 - $750,000, but we also have a lot of high net worth investors, doctors that don't know CityVest. They haven't invested with us yet. I'm happy to accept their $25,000 investment. Our experience is, that within six months, they're in two or three more investments, investing $50,000 and $75,000. So everybody's got to start somewhere. $25,000 is a good place to start. If you haven't invested with this, get to know our dashboard, what we're doing, level of due diligence. We are limited, however, to just 99 investors. We're already at about 40 today. We've got about $2.5 million in the bank. So, if you are thinking about a fund, this would be a great fund to start with. It is clearly an institutional fund, raising $250 million and you can start at $25,000 - $50,000 but there are other investors who've gotten comfortable at much higher amounts closer to $500,000 and $750,000.

Adam Gower: All right, last thing. So, if somebody was to hear only one thing from you - the elevator pitch, for this deal, what would you like them to take away? What would be the key highlights, that you want them to take away if it was the    only thing they heard was what you were going to say now, for a minute or two?

Alan Donenfeld: Right. So I think the takeaway is that CityVest offers a service that I wish I had when I started investing in real estate quite a while ago. Which is someone to search for the best institutional funds and that's not an easy process. We look at about 700 funds per year to pick out the dozen or so that outperform, that have solid auditors, administrators, audited track record. So we do that. The first level is, we search a lot of funds to vet them and find the best ones and then we structure the investment in that fund to give us better terms, which we deliver to investors. So, we are a great service to help high net worth investors find what we think are the best real estate investments.

Adam Gower: Alan Donenfeld, CityVest. Always an enormous pleasure. What an amazing new fund you've got for everybody. Thank you so much.

Alan Donenfeld: Yeah, my pleasure. It's great to relay what we're working on. Hopefully, your audience appreciates what we're delivering and we're happy to do all this work. We are co-investing in our own funds, so to an extent, we're looking for funds for our own capital but we're happy to share those opportunities with other people. Thanks for joining.

Adam Gower: Thanks so much, Alan.

Alan Donenfeld: Okay, bye bye.